Four Reasons Maine Needs to Reform Unfunded Government Employee Pensions

Four Reasons Maine Needs to Reform Unfunded Government Employee Pensions

March 7, 2011 Posted by Tarren Bragdon - 3 Comments

There is no doubt – unfunded government employee pensions are bankrupting our future.  Without reform, Maine families face crumbling roads, failing schools, a broken health care safety net, and even higher taxes.

Next fiscal year, without the reasonable reforms in the budget, the increase in the unfunded government employee pensions would have consumed every new dollar collected in the General Fund in FY2012 and more.  Without reform, the unfunded government employee pension would cost taxpayers almost a billion dollars a year by 2020.  That’s more than the entire state aid for local education today.

Today almost 80% of the state General Fund budget goes to education and health care.  If unfunded government employee pensions consume the majority of all new tax dollars, that means school kids, patients, the elderly and those with disabilities will be pushed aside.  That’s wrong.

Governor LePage has a plan to begin addressing this huge problem, and I have four brief points that support the Governor’s proposed reforms:

1.       The reforms are modest but save a massive amount of money in the budget and over the next 16 years, protecting our state and taxpayers from potentially bankrupting costs. The reforms will save $6.8 billion in lower UAL payments, normal costs and retiree health costs over the next 16 years, with about 76% of savings accruing to the General Fund.

2.       The vast majority of private sector workers do not have access to such lavish retiree pensions or any subsidized retiree health coverage. In fact, only one in five private sector workers have access to defined-benefit pensions or early retiree health coverage.  Only one in six private sector workers have access to retiree health coverage after age 65.[i] The governor’s budget preserves the defined benefit and retiree coverage for state employees and teachers.

Access to Retiree Benefits

3.       Even with these reforms, state employees and teachers are still receiving pensions 55% higher than Maine people retiring with just Social Security. Even with the COLA change, MainePERS recipients will receive COLAs similar to those on Social Security today.[i]

4.       Compared to a typical Maine worker in Social Security their entire working life, the identical state employee or teacher would have a retirement benefit worth $560,000 more. For a high wage state employee, their retiree benefit is worth $1.5 million more than a comparable private sector worker in Social Security.[i] Particularly when one considers that the average state employee or teacher can retire at 60 or 62 now compared to 66 or 67 for those in Social Security.  Even with the reforms, government workers will retire one to two years earlier than their private sector counterparts, with much higher pensions and with retiree health benefits.  Consider the examples below:

Retirement Benefits Comparison

To put value of the MainePERS benefit in context further, it would take a state employee or teacher working in the MainePERS system just 13 to 16 years to match the benefit the private sector worker gets from Social Security after 40 years.

The Governor’s pension reforms are modest, reasonable and save the state budget and state taxpayers from bankruptcy.  We need to enact these reforms.

Sources:

[1] Source: Paul Fronstin, “Implications of Health Reform for Retiree Health Benefits,” EBRI Issue Brief,no. 338 (January 2010). Available at: http://www.ebri.org/pdf/briefspdf/EBRI_IB_01-2010_No338_RetHlth1.pdf and “Table 2. Retirement Benefits: Access, Participation, and Take-Up Rates, Private Industry Workers.” National Compensation Survey. Bureau of Labor Statistics.  March 2010.  Available at: http://www.bls.gov/ncs/ebs/benefits/2010/ownership/private/table02a.htm

[1] Social Security facts available at: http://www.ssa.gov/policy/docs/factsheets/cong_stats/2009/me.html and http://www.ssa.gov/oact/COLA/colaseries.html.  The MainePERS facts are available at http://www.mainepers.org/PDFs/Leg%20Pension%20Cost%20Request%20FINAL%20DRAFT.pdf and MaineOpenGov.org for average pension by year.

[1] Figures for social security benefit are from the Social Security Administration and found available: http://www.ssa.gov/oact/ProgData/retirebenefit1.html and http://www.ssa.gov/oact/ProgData/retirebenefit2.html.   For comparison, the average Maine person age 50-60 earns $42,195 according to the US Census Bureau (source: U.S. Census Bureau Current Population Survey, Annual Social and Economic Supplement, 2007 through 2009, available at census.gov). MainePERS benefit is based on 2% credit for each year worked (40) and average final salary for the last three years.  Retiree health benefits are based on the employee paying 10% of the premium for those with a pension of $30k-$80k a year and 15% of premium for those with a pension over $80k.  Premiums are assumed to increase 4% annually beginning in 2014.  The annual COLA is assumed to be 2.89% annually for Social Security and 1.75% annually for MainePERS, beginning in 2014.  At age 65, the MainePERS retiree health benefit switch to a Medicare Advantage plan that has a lower cost.